Was the Bank of England’s Monetary Policy Committee right to reject further stimulus?


David Kern

The Monetary Policy Committee’s (MPC) decision to keep quantitative easing (QE) at £375bn was the correct one. Opinion has shifted in recent months against adding to QE. But the MPC remains divided on the subject, and an increase cannot be ruled out if the economy weakens further in early 2013. Such a move would be wrong and counter-productive. QE should only be considered if new threats emerge to the stability of the UK banking system. At a time when yields on gilts are low, and sterling is competitive, it will offer little benefit. Higher QE would increase long-term risks of bubbles, financial distortions, and higher inflation. With annual consumer price index inflation expected to remain above the 2 per cent target for a considerable time, using QE to limit falls in inflation would be folly. Higher inflation is a big short-term risk; it would squeeze disposable incomes and seriously threaten any revival in UK growth.

David Kern is chief economist at the British Chambers of Commerce.


Victoria Redwood

The Bank of England should be loosening policy further – whether via more quantitative easing, another cut in interest rates, or more unorthodox measures. The Bank still expects a fairly good economic recovery over the next couple of years, but it is hard to see where the growth will come from. Like the Office for Budget Responsibility, the Bank expects growth of 1.2 per cent next year, but we expect just 0.5 per cent. And a triple dip recession remains a serious risk. Meanwhile, inflation is above target and rising, but underlying inflationary pressures remain subdued. We still think that inflation will fall below its target further ahead. Although some are worried that above-target inflation will push up wage growth, that seems unlikely when unemployment is still high. In our view, all of this points to the Bank of England needing to do more to stimulate the economy.

Victoria Redwood is chief UK economist at Capital Economics.